UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q





x  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      quarterly period ended June 30, 2007




o  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      transition period from __________ to __________




Commission
      File No. 0-11201




Merrimac
      Industries, Inc.


(Exact
      Name of Registrant as Specified in Its Charter)


****


DELAWARE
            22-1642321(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)




41
      FAIRFIELD PLACE


WEST
      CALDWELL, NEW JERSEY 07006


(Address
      of Principal Executive Offices) (Zip Code)





(973)
      575-1300


(Registrant’s
      Telephone Number)


****


Former
      name, former address and former fiscal year, if changed since last report: N/A





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No
o





Indicate
                by check mark whether the registrant is a large accelerated filer,
                an
                accelerated filer, or a non-accelerated filer. See definition of
                "accelerated filer and large accelerated filer" in Rule 12b-2 of
                the
                Exchange Act. (Check one):Large
                accelerated filer   o
            Accelerated
                filer   o
            Non-accelerated
                filer   x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes
o  No
x





As
      of
      August 10, 2007, there were 2,916,035 shares of Common Stock, par value $.01
      per
      share, outstanding.







MERRIMAC
      INDUSTRIES, INC.


41
      Fairfield Place


West
      Caldwell, NJ 07006





INDEX




PagePART
                I. FINANCIAL INFORMATIONItem
                1.
            Financial
                StatementsConsolidated
                Statements of Operations and Comprehensive Incomefor
                the Quarters and Six Months Ended June 30, 2007and
                July 1, 2006 (Unaudited)
            
            1Consolidated
                Balance Sheets-June 30, 2007 (Unaudited) andDecember
                30, 2006
            
            2Consolidated
                Statement of Stockholders’ Equity as ofJune
                30, 2007 (Unaudited)
            
            3Consolidated
                Statements of Cash Flows for the Six MonthsEnded
                June 30, 2007 and July 1, 2006 (Unaudited)
            
            4Notes
                to Consolidated Financial Statements
            
            5Item
                2.
            Management's
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            
            15Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            25Item
                4.
            Controls
                and Procedures
            
            25PART
                II. OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            
            25Item 1A.
            Risk
                Factors
            
            25Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            26Item
                5.
            Other
                Matters
            
            26Item
                6.
            Exhibits
            
            27Signatures
            
            
            28









PART
      I.
      FINANCIAL INFORMATION





ITEM
      1.
      FINANCIAL STATEMENTS





MERRIMAC
      INDUSTRIES, INC.





CONSOLIDATED
      STATEMENTS OF OPERATIONS


AND
      COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)




Quarters
                Ended
            
            Six
                Months EndedJune
                30,
            
            July
                1,
            
            June
                30,
            
            July
                1,2007
            
            2006
            
            2007
            
            2006OPERATIONSNet
                sales
            
            $
            6,225,005
            
            $
            8,250,886
            
            $
            11,649,284
            
            $
            14,481,589Costs
                and expenses:Cost
                of sales
            
            
            3,842,532
            
            
            4,540,285
            
            
            7,485,151
            
            
            8,370,051Selling,
                general and administrative
            
            
            2,284,375
            
            
            2,645,035
            
            
            4,775,226
            
            
            5,130,929Research
                and development
            
            
            360,571
            
            
            516,096
            
            
            871,567
            
            
            888,044Goodwill
                impairment charge
            
            
            2,630,000
            
            
            -
            
            
            2,630,000
            
            
            -9,117,478
            
            
            7,701,416
            
            
            15,761,944
            
            
            14,389,024Operating
                income (loss)
            
            
            (2,892,473
            )
            
            549,470
            
            
            (4,112,660
            )
            
            92,565Interest
                and other expense, net
            
            
            (70,450
            )
            
            (32,977
            )
            
            (114,065
            )
            
            (51,681
            )Income
                (loss) before income taxes
            
            
            (2,962,923
            )
            
            516,493
            
            
            (4,226,725
            )
            
            40,884Provision
                (benefit) for income taxes
            
            
            506,000
            
            
            (13,000
            )
            
            506,000
            
            
            (48,000
            )Net
                income (loss)
            
            $
            (3,468,923
            )
            $
            529,493
            
            $
            (4,732,725
            )
            $
            88,884Net
                income (loss) per common share-basic
            
            $
            (1.19
            )
            $
            .17
            
            $
            (1.58
            )
            $
            .03Net
                income (loss) per common share-diluted
            
            $
            (1.19
            )
            $
            .17
            
            $
            (1.58
            )
            $
            .03Weighted
                average number of shares outstanding:Basic
            
            
            2,910,711
            
            
            3,143,725
            
            
            3,003,513
            
            
            3,146,444Diluted
            
            
            2,910,711
            
            
            3,183,322
            
            
            3,003,513
            
            
            3,166,243COMPREHENSIVE
                INCOME (LOSS)Net
                income (loss)
            
            $
            (3,468,923
            )
            $
            529,493
            
            $
            (4,732,725
            )
            $
            88,884Comprehensive
                income:Foreign
                currency translation adjustment
            
            
            307,131
            
            
            327,556
            
            
            368,514
            
            
            318,847Comprehensive
                income (loss)
            
            $
            (3,161,792
            )
            $
            857,049
            
            $
            (4,364,211
            )
            $
            407,731




See accompanying notes.




1




MERRIMAC
      INDUSTRIES, INC.


CONSOLIDATED
      BALANCE SHEETS


June
                  30, 2007
              
              December
                  30, 2006(UNAUDITED)
              
              (Note
                  1)ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              2,817,408
              
              $
              5,961,537Accounts
                  receivable, net
              
              
              5,230,332
              
              
              5,851,617Income
                  tax refunds receivable
              
              
              103,000
              
              
              99,000Inventories,
                  net
              
              
              4,783,787
              
              
              3,917,473Other
                  current assets
              
              
              726,555
              
              
              881,699Deferred
                  tax assets
              
              
              -
              
              
              10,000Total
                  current assets
              
              
              13,661,082
              
              
              16,721,326Property,
                  plant and equipment
              
              
              41,235,675
              
              
              40,084,105Less
                  accumulated depreciation and amortization
              
              
              28,497,706
              
              
              27,098,740Property,
                  plant and equipment, net
              
              
              12,737,969
              
              
              12,985,365Other
                  assets
              
              
              538,654
              
              
              491,596Deferred
                  tax assets
              
              
              100,000
              
              
              552,000Goodwill
              
              
              1,062,534
              
              
              3,503,219Total
                  Assets
              
              $
              28,100,239
              
              $
              34,253,506LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  liabilities:Current
                  portion of long-term debt
              
              $
              620,655
              
              $
              648,524Accounts
                  payable
              
              
              1,438,141
              
              
              994,221Accrued
                  liabilities
              
              
              1,322,755
              
              
              1,420,322Customer
                  deposits
              
              
              305,783
              
              
              203,783Deferred
                  income taxes
              
              
              100,000
              
              
              100,000Total
                  current liabilities
              
              
              3,787,334
              
              
              3,366,850Long-term
                  debt, net of current portion
              
              
              4,277,279
              
              
              4,564,040Deferred
                  liabilities
              
              
              49,569
              
              
              37,839Total
                  liabilities
              
              
              8,114,182
              
              
              7,968,729Commitments
                  and contingenciesStockholders'
                  equity:Preferred
                  stock, par value $.01 per share:Authorized:
                  1,000,000 sharesNo
                  shares issuedCommon
                  stock, par value $.01 per share:20,000,000
                  shares authorized; 3,278,940 and 3,265,638 shares issued;and
                  2,916,035 and 3,141,433 shares outstanding, respectively
              
              
              32,789
              
              
              32,656Additional
                  paid-in capital
              
              
              19,450,788
              
              
              19,237,130Retained
                  earnings
              
              
              1,867,092
              
              
              6,599,817Accumulated
                  other comprehensive income
              
              
              1,757,552
              
              
              1,389,03823,108,221
              
              
              27,258,641Less
                  treasury stock, at cost - 362,905 shares at June 30, 2007
                  and124,205
                  shares at December 30, 2006
              
              
              (3,122,164
              )
              
              (973,864
              )Total
                  stockholders' equity
              
              
              19,986,057
              
              
              26,284,777Total
                  Liabilities and Stockholders' Equity
              
              $
              28,100,239
              
              $
              34,253,506
  See accompanying notes.
  2


MERRIMAC
      INDUSTRIES, INC.


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY


SIX
      MONTHS ENDED JUNE 30, 2007


(UNAUDITED)


AccumulatedAdditional
              
              
              
              OtherCommon
                  Stock
              
              Paid-in
              
              Retained
              
              Comprehensive
              
              Treasury
              
              StockShares
              
              Amount
              
              Capital(A)
              
              Earnings
              
              Income
              
              Shares
              
              Amount
              
              TotalBalance,
                  December 30, 2006
              
              
              3,265,638
              
              $
              32,656
              
              $
              19,237,130
              
              $
              6,599,817
              
              $
              1,389,038
              
              
              124,205
              
              $
              (973,864
              )
              
              26,284,777Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (4,732,725
              )
              
              
              
              
              
              
              
              
              
              
              (4,732,725
              )Share-based
                  compensation
              
              
              
              
              
              
              
              
              132,466
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              132,466Stock
                  Purchase Plan sales
              
              
              1,002
              
              
              10
              
              
              7,485
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,495Exercise
                  of stock options
              
              
              9,300
              
              
              93
              
              
              73,707
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              73,800Vesting
                  of restricted stock.
              
              
              3,000
              
              
              30
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              30Repurchase
                  of common stockFor
                  the treasury
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              238,700
              
              
              (2,148,300
              )
              
              (2,148,300
              )Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              368,514
              
              
              
              
              
              
              
              
              368,514Balance,
                  June 30, 2007
              
              
              3,278,940
              
              $
              32,789
              
              $
              19,450,788
              
              $
              1,867,092
              
              $
              1,757,552
              
              
              362,905
              
              $
              (3,122,164
              )
              $
              19,986,057


(A)
      Tax
      benefits associated with the exercise of employee stock options are recorded
      to
      additional paid-in capital when such benefits are realized.





See
      accompanying notes.




3


MERRIMAC
      INDUSTRIES, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)




Six
                Months EndedJune
                30, 2007
            
            July
                1, 2006Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (4,732,725
            )
            $
            88,884Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            1,291,531
            
            
            1,317,701Amortization
                of deferred financing costs
            
            
            14,716
            
            
            24,960Impairment
                of goodwill
            
            
            2,630,000
            
            
            -Deferred
                income taxes
            
            
            506,000
            
            
            -Share-based
                compensation
            
            
            132,496
            
            
            82,000Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            685,580
            
            
            (174,158
            )Income
                tax refunds receivable
            
            
            -
            
            
            (15,228
            )Inventories
            
            
            (845,896
            )
            
            (286,625
            )Other
                current assets
            
            
            166,434
            
            
            77,199Other
                assets
            
            
            (61,774
            )
            
            (21,511
            )Accounts
                payable
            
            
            399,742
            
            
            (95,417
            )Accrued
                liabilities
            
            
            (122,811
            )
            
            96,469Customer
                deposits
            
            
            102,000
            
            
            (737,176
            )Deferred
                liabilities
            
            
            11,730
            
            
            8,490Net
                cash provided by operating activities
            
            
            177,023
            
            
            365,588Cash
                flows from investing activities:Purchases
                of capital assets
            
            
            (927,061
            )
            
            (979,366
            )Net
                cash used in investing activities
            
            
            (927,061
            )
            
            (979,366
            )Cash
                flows from financing activities:Borrowings
                from revolving lease line
            
            
            -
            
            
            159,988Repurchase
                of common stock for the treasury
            
            
            (2,148,300
            )
            
            -Repayment
                of borrowings
            
            
            (343,496
            )
            
            (464,263
            )Proceeds
                from the exercise of stock options
            
            
            73,800
            
            
            13,600Proceeds
                from Stock Purchase Plan sales
            
            
            7,495
            
            
            172,763Net
                cash used in financing activities
            
            
            (2,410,501
            )
            
            (117,912
            )Effect
                of exchange rate changes
            
            
            16,410
            
            
            33,122Net
                decrease in cash and cash equivalents
            
            
            (3,144,129
            )
            
            (698,568
            )Cash
                and cash equivalents at beginning of year
            
            
            5,961,537
            
            
            4,081,330Cash
                and cash equivalents at end of period
            
            $
            2,817,408
            
            $
            3,382,762Supplemental
                disclosures of cash flow information:Cash
                paid during the period for:Interest
                on credit facilities
            
            $
            205,558
            
            $
            144,331Non
                cash activities:Repurchase
                of common stock for treasury
            
            $
            -
            
            $
            399,998Loan
                to officer-stockholder repaid through repurchase of common stock
                for
                treasury
            
            $
            -
            
            $
            400,000





See
      accompanying notes .




4




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





1.
      BASIS
      OF PRESENTATION





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with the instructions to Form 10-Q and therefore do not include
      all
      information and footnote disclosures otherwise required by accounting principles
      generally accepted in the United States of America for a full fiscal year.
      The
      financial statements do, however, reflect all adjustments of a normal recurring
      nature which are, in the opinion of management, necessary for a fair
      presentation of the financial position of Merrimac Industries, Inc. (“Merrimac”
or the “Company”) as of June 30, 2007 and its results of operations and cash
      flows for the periods presented. Results of operations of interim periods are
      not necessarily indicative of results for a full year.





The
      consolidated balance sheet at December 30, 2006 has been derived from the
      audited financial statements at that date but does not include all the
      information required by accounting principles generally accepted in the United
      States of America for complete financial statements. For further information,
      refer to the consolidated financial statements and footnotes thereto included
      in
      the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
      Commission on April 16, 2007 for the year ended December 30, 2006.




2.
      CONTRACT REVENUE RECOGNITION





The
      Company recognizes revenue in accordance with the provisions of Staff Accounting
      Bulletin No. 104. Contract revenue and related costs on fixed-price and
      cost-reimbursement contracts that require customization of products to customer
      specifications are recorded when title transfers to the customer, which is
      generally on the date of shipment. Prior to shipment, manufacturing costs
      incurred on such contracts are recorded as work-in-process inventory.
      Anticipated losses on contracts are charged to operations when identified.
      Revenue related to non-recurring engineering charges is generally recognized
      upon shipment of the related initial units produced or based upon contractually
      established stages of completion.





The
      cost
      rates utilized for cost-reimbursement contracts are subject to review by third
      parties and can be revised, which can result in additions to or reductions
      from
      revenue. Revisions which result in reductions to revenue are recognized in
      the
      period that the rates are reviewed and finalized; additions to revenue are
      recognized in the period that the rates are reviewed, finalized, accepted by
      the
      customer, and collectability from the customer is reasonably assured. The
      Company submits financial information regarding the cost rates on
      cost-reimbursement contracts for each fiscal year in which the Company performed
      work on cost-reimbursement contracts. The Company does not record any estimates
      on a regular basis for potential revenue adjustments, as there currently is
      no
      reasonable basis on which to estimate such adjustments given the Company’s very
      limited experience with these contracts. $250,000 of revenue was recognized
      related to cost reimbursement contracts during the second quarter and first
      six
      months of 2006. No revenue was recognized related to cost-reimbursement
      contracts during the second quarter and first six months of 2007.




3.
      ACCOUNTING PERIOD





The
      Company's fiscal year is the 52-53 week period ending on the Saturday closest
      to
      December 31. The Company has quarterly dates that correspond with the Saturday
      closest to the last day of each calendar quarter and each quarter consists
      of 13
      weeks in a 52-week year. Periodically, the additional week to make a 53-week
      year (fiscal year 2003 was the last and fiscal year 2008 will be the next)
      is
      added to the fourth quarter, making such quarter consist of 14
      weeks.





4.
      COMPREHENSIVE INCOME (LOSS)





Comprehensive
      income (loss) is defined as the change in equity of a company during a period
      from transactions and other events and circumstances from non-owner sources.
      Accumulated other comprehensive income at June 30, 2007 and December 30, 2006
      was attributable solely to the effects of foreign currency
      translation.





5.
      RECENT
      ACCOUNTING PRONOUNCEMENTS





On
      November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP 123R-3"),
      "Transition Election Related to Accounting for the Tax Effects of Share-based
      Payment Awards," that provides an elective alternative transition method of
      calculating the pool of excess tax benefits available to absorb tax deficiencies
      recognized subsequent to the adoption of SFAS 123R (the "APIC Pool") to the
      method otherwise required by paragraph 81 of SFAS 123R. The Company elected to
      use
      the regular method to calculate the APIC Pool. The regular method will not
      have
      an impact on the Company's results of operations or financial condition for
      the
      quarter and six monthsended
      June 30, 2007, due to the fact that the Company is currently using prior period
      net operating losses and has not realized any tax benefits under SFAS 123R.




5




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition
      threshold and measurement of a tax position taken or expected to be taken in
      a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition. The Company adopted FIN 48 on December 31, 2006. The adoption of
      FIN
      48 did not have an impact on the opening retained earnings of the Company.





6.
      SHARE-BASED COMPENSATION





On
      January 1, 2006, the start of the first quarter of fiscal 2006, the Company
      adopted the provisions of Statement of Financial Accounting Standards No. 123
      (revised 2004), "Share-Based Payment" ("SFAS 123R") which requires that the
      costs resulting from all share-based payment transactions be recognized in
      the
      financial statements at their fair values. The Company adopted SFAS 123R using
      the modified prospective application method under which the provisions of SFAS 123R
      apply to new awards and to awards modified, repurchased, or cancelled after
      the
      adoption date. Additionally, compensation cost for the portion of the awards
      for
      which the requisite service has not been rendered that are outstanding as of
      the
      adoption date is recognized in the consolidated statement of operations over
      the
      remaining service period after the adoption date based on the award's original
      estimate of fair value.





Because
      of the Company’s net operating loss carryforwards, no tax benefits resulting
      from the exercise of stock options have been recorded, thus there was no effect
      on cash flows from operating or financing activities.





For
      the
      quarters and six months ended June 30, 2007 and July 1, 2006, share-based
      compensation expense related to the 2001 Employee Stock Purchase Plan and the
      various stock option plans was allocated as follows:





Quarters
                Ended
            
            Six
                Months EndedJune
                30, 2007
            
            July
                1, 2006
            
            June
                30, 2007
            
            July
                1, 2006Cost
                of sales
            
            $
            21,000
            
            $
            4,000
            
            $
            29,000
            
            $
            15,000Selling,
                general and administrative
            
            
            60,000
            
            
            34,000
            
            
            103,000
            
            
            67,000Total
                share-based compensation
            
            $
            81,000
            
            $
            38,000
            
            $
            132,000
            
            $
            82,000




The
      fair
      value of the options granted was estimated on the date of grant using the
      Black-Scholes option valuation model.





The
      following weighted average assumptions for the quarters and six months ended
      June 30, 2007 and July 1, 2006 were utilized:


2007
              
              2006Expected
                  option life (years)
              
              
              3.0
              
              
              3.0Expected
                  volatility
              
              
              22.00
              %
              
              30.00
              %Risk-free
                  interest rate
              
              
              4.93
              %
              
              5.15
              %Expected
                  dividend yield
              
              
              0.00
              %
              
              0.00
              %Fair
                  value per share of options granted
              
              $
              2.03
              
              $
              2.57




The
      Black-Scholes option valuation model was developed for use in estimating the
      fair value of traded options, which have no vesting restrictions and are fully
      transferable. In addition, option valuation models require the input of highly
      subjective assumptions including the expected stock price volatility. Because
      the Company's employee stock options and subscription rights have
      characteristics significantly different from those of traded options, and
      because changes in the subjective input assumptions can materially affect the
      fair value estimate, in management's opinion, the existing models do not
      necessarily provide a reliable single measure of the fair value of its employee
      stock options and subscription rights.





6


MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





Share-Based
      Compensation Plans:





On
      June
      22, 2006, the Company’s stockholders approved three new share-based compensation
      programs as follows: (i) 2006 Stock Option Plan; (ii) 2006 Key Employee
      Incentive Plan; and (iii) 2006 Non-Employee Directors’ Stock Plan.





The
      2006
      Stock Option Plan authorizes the grant of an aggregate of 500,000 shares of
      Common Stock to employees, directors and consultants of the Company. Under
      the
      2006 Stock Option Plan, the
      Company may grant to eligible individuals incentive stock options, as defined
      in
      Section 422 of the Internal Revenue Code of 1986 (the “Code”), and/or
      non-qualified stock options. The purposes of the 2006 Stock Option Plan are
      to
      attract, retain and motivate employees, compensate consultants, and to enable
      employees, consultants and directors, including non-employee directors,
      to participate in the long-term growth of the Company by providing for or
      increasing the proprietary interests of such persons in the Company, thereby
      assisting the Company to achieve its long-range goals. The 2006 Stock Option
      Plan replaced the 2001 Stock Option Plan, and the remaining 19,700 unissued
      options under the 2001 Stock Option Plan are no longer available for
      grant.





At
      June
      30, 2007, there were 332,700 options outstanding under the 2006 Stock Option
      Plan of which 27,500 were exercisable. Options are granted at the closing price
      of the Company’s shares on the American Stock Exchange on the date immediately
      prior to grant, pursuant to the 2006 Stock Option Plan. Options available for
      grant under the 2006 Stock Option Plan were 167,300 at June 30,
      2007.





At
      June
      30, 2007, the Company also maintains share-based compensation arrangements
      under
      the following plans: (i) 1993 Stock Option Plan; (ii) 1997 Long-Term Incentive
      Plan; and (iii) 2001 Stock Option Plan.





At
      June
      30, 2007, there were 292,742 options outstanding under the 1993 Stock Option
      Plan, the 1997 Long Term Incentive Plan and the 2001 Stock Option Plan, of
      which
      all were exercisable. No options are available for future grant under the 1993
      Stock Option Plan, the 1997 Long Term Incentive Plan or the 2001 Stock Option
      Plan.





A
      summary
      of all stock option activity and information related to all options outstanding
      follows:





Weighted-Weighted-
            
            
            
            AverageAverage
            
            
            
            Remaining
            
            AggregateExercise
            
            
            
            Contractual
            
            IntrinsicPrice
            
            Shares
            
            Term
            
            ValueOutstanding
                at December 30, 2006
            
            $
            9.55
            
            
            407,092Granted
            
            
            9.34
            
            
            247,200Exercised
            
            
            7.94
            
            
            (9,300
            )Cancelled
            
            
            11.02
            
            
            (19,550
            )Outstanding
                at June 30, 2007
            
            $
            9.48
            
            
            625,442
            
            
            6.9
            
            $
            576,000Exercisable
                at June 30, 2007
            
            $
            9.09
            
            
            320,242
            
            
            4.3
            
            $
            429,000




The
      total
      intrinsic value of options exercised for the quarters ended June 30, 2007 and
      July 1, 2006 was $11,000 and $1,000, respectively. The total intrinsic value
      of
      options exercised for the six-month periods ended June 30, 2007 and July 1,
      2006
      was $16,000 and $4,000, respectively.





The
      total
      fair value of options granted for the quarter and six months ended June 30,
      2007
      was approximately $501,000. The total fair value of options granted for the
      quarter and six months July 1, 2006 was approximately $212,000.





As
      of
      June 30, 2007, the total future compensation cost related to nonvested stock
      options and the employee stock purchase plan not yet recognized in the statement
      of operations was $718,000. Of that total, $186,000, $269,000, $198,000 and
      $65,000 are expected to be recognized in 2007, 2008, 2009 and 2010,
      respectively.





The
      2006
      Non-Employee Directors’ Stock Plan is a plan that authorizes the grant of an
      aggregate of 100,000 shares of Common Stock to the non-employee directors of
      the
      Company. The plan authorizes each non-employee director to receive 1,500 shares
      of restricted stock beginning in 2006, and 1,500 shares or such other amount
      as
      the Board of Directors may, from time to time, decide for each year in the
      future following the Company’s Annual Meeting of Stockholders.




7





MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





On
      June
      20, 2007, the Company issued a grant of 10,500 shares of restricted stock to
      its
      non-employee directors. The per share price of the grant was $9.78 (the closing
      price of the Company’s shares on the American Stock Exchange on the date
      immediately prior to the grant, pursuant to the terms of the plan). One third
      of
      such restricted stock vests on the anniversary of the grant date over a
      three-year period. Share-based compensation expense for the quarter and six
      months ended June 30, 2007 related to the grant of restricted stock was
      approximately $7,000 and $14,000, which was based on a straight-line
      amortization. Restricted shares of common stock
      available for grant under the 2006 Non-Employee Directors’ Stock Plan were
      80,500 at June 30, 2007.





A
      summary
      of unvested restricted stock activity and information related to all restricted
      stock outstanding follows:


Weighted-AverageGrant-DayFair
                  Value
              
              SharesOutstanding
                  at December 30, 2006
              
              $
              9.52
              
              
              9,000Granted
              
              
              9.78
              
              
              10,500Vested
              
              
              9.52
              
              
              (3,000
              )Outstanding
                  at June 30, 2007
              
              $
              9.69
              
              
              16,500


7.
      GOODWILL





Goodwill
      primarily includes the excess purchase price paid over the fair value of net
      assets acquired in the Company’s 1999 acquisition of Filtran Microcircuits Inc.
      (“FMI”). When the Company adopted Statement of Financial Accounting Standards
      No. 142, "Goodwill and Other Intangible Assets"("SFAS 142"), the net carrying
      value of the FMI goodwill was $2,745,000, which was reduced by $435,000 of
      accumulated amortization. Under SFAS 142, the Company ceased amortization of
      goodwill and tests its goodwill on an annual basis, or whenever events or
      circumstances indicate that impairment may have occurred. Under SFAS 142
      goodwill impairment is determined using a two-step process. The first step
      of
      the goodwill impairment test is to identify a potential impairment by comparing
      the fair value of a reporting unit with its carrying amount, including goodwill.
      If the estimated fair value of the reporting unit exceeds its carrying amount,
      the reporting unit’s goodwill is not considered to be impaired and the second
      step of the impairment test is unnecessary. If the carrying amount of the
      reporting unit exceeds its fair value, the second step of the goodwill
      impairment test is performed to measure the amount of impairment loss, if any.
      The second step of the goodwill impairment test compares the implied fair value
      of the reporting unit’s goodwill, determined in the same manner as the amount of
      goodwill recognized in a business combination, with the carrying amount of
      such
      goodwill. If the carrying  amount
      of
      the reporting unit’s goodwill exceeds the implied fair value of that goodwill,
      an impairment loss is recognized in an amount equal to that excess.





During
      the quarter ended June 30, 2007, the Company initiated an interim goodwill
      impairment test of its FMI reporting unit. This occurred as a result of FMI’s
      failure to meet 2007 bookings and sales targets, which resulted in continuing
      operating losses and a reduction of its bank borrowing availability. The
      estimates of fair value of the reporting unit are determined using a discounted
      cash flow analysis. A discounted cash flow analysis requires the Company to
      make
      various judgmental assumptions and estimates, including assumptions about future
      cash flows, growth rates and discount rates. The assumptions and estimates
      about
      the future cash flows and growth rates are based on the reporting unit’s budgets
      and business plans. Discount rate assumptions are based on an assessment of
      the
      risk inherent in the future cash flows of the reporting unit. As a result of
      the
      impairment test, the Company recorded a non-cash goodwill impairment charge
      of
      $2,630,000 related to the Company’s FMI reporting unit for the quarter ended
      June 30, 2007. The impairment charges did not affect the Company’s liquidity or
      result in non-compliance with any financial debt covenants.




8


MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





The
      changes in the carrying amount of goodwill for the six months ended June 30,
      2007 and the fiscal year ended December 30, 2006 are as follows:


2007
              
              2006Original
                  balance
              
              $
              3,179,341
              
              $
              3,179,341Accumulated
                  amortization through 2001
              
              
              (434,603
              )
              
              (434,603
              )Impairment
                  charge, current year
              
              
              (2,630,000
              )
              
              -Accumulated
                  foreign currency adjustment throughprior
                  year
              
              
              758,481
              
              
              756,455Foreign
                  currency adjustment, current year
              
              
              189,315
              
              
              2,026Balance,
                  end of period
              
              $
              1,062,534
              
              $
              3,503,219




8.
      INVENTORIES





Inventories
      are stated at the lower of cost or market, using the average cost method. Cost
      includes materials, labor, and manufacturing overhead related to the purchase
      and production of inventories.





Inventories
      consist of the following:




June
                30,2007
            
            December
                30,2006Finished
                goods
            
            $
            225,028
            
            $
            345,519Work
                in process
            
            
            2,406,415
            
            
            1,634,475Raw
                materials and purchased parts
            
            
            2,152,344
            
            
            1,937,479Total
            
            $
            4,783,787
            
            $
            3,917,473




The
      Company recorded provisions for obsolescence and cost overruns of $154,000
      and
      $80,000 for the quarters ended June 30, 2007 and July 1, 2006, respectively,
      and
      $178,000 and $100,000 for the six months ended June 30, 2007 and July 1, 2006,
      respectively.





9.
      CURRENT AND LONG-TERM DEBT





The
      Company was obligated under the following debt instruments at June 30, 2007
      and
      December 30, 2006:




2007
              
              2006North
                  Fork Bank (A):Revolving
                  line of credit, 2.00% above LIBOR or 0.50% below prime
              
              $
              -
              
              $
              -Term
                  loan, due October 1, 2011, 2.25% above LIBOR or 0.50%below
                  prime
              
              
              1,700,000
              
              
              1,900,000Mortgage
                  loan, due October 1, 2016, 2.25% above LIBOR or 0.50%below
                  prime
              
              
              2,887,500
              
              
              2,962,500


The
      Bank
      of Nova Scotia (B):


Capital
                  leases, interest 7.35%, due March 2007
              
              
              -
              
              
              15,389Capital
                  leases, interest 7.50%, due May 2007
              
              
              -
              
              
              20,590Capital
                  leases, interest 5.80%, due January 2010
              
              
              168,686
              
              
              173,170Capital
                  leases, interest 6.60%, due March 2011
              
              
              141,748
              
              
              140,9154,897,934
              
              
              5,212,564Less
                  current portion
              
              
              620,655
              
              
              648,524Long-term
                  portion
              
              $
              4,277,279
              
              $
              4,564,040


(A)
            On
                October 18, 2006, the Company entered into a financing agreement
                with
                North Fork Bank which consists of a two-year $5,000,000 revolving
                line of
                credit, a five-year $2,000,000 machinery and equipment term loan
                due
                October 1, 2011 (“Term Loan”) and a ten-year $3,000,000 real estate term
                loan due October 1, 2016 (“Mortgage Loan”). This financing agreement
                replaced the prior financing agreement with CIT. Completion of the
                financing agreement resulted in additional cash loan proceeds of
                approximately $2,900,000 plus the release of previously restricted
                cash of
                $1,500,000. The revolving line of credit is subject to an availability
                limit under a borrowing base calculation (85% of eligible accounts
                receivable plus up to 50% of eligible raw materials inventory plus
                up to
                25% of eligible electronic components, with an inventory advance
                sublimit
                not to exceed $1,500,000, as defined in the financing agreement).
                The
                revolving line of credit expires October 18, 2008. At June 30, 2007,
                the
                Company had available borrowing capacity under its revolving line
                of
                credit of $3,100,000. The revolving line of credit bears interest
                at the
                prime rate less 0.50% (currently 7.75%) or LIBOR plus 2.00%. The
                principal
                amount of the Term Loan is payable in 59 equal monthly installments
                of
                $33,333 and one final payment of the remaining principal balance
                of
                $33,333. The Term Loan bears interest at the prime rate less 0.50%
                (currently 7.75%) or LIBOR plus 2.25%. The principal amount of the
                Mortgage Loan is payable in 119 equal monthly installments of $12,500
                and
                one final payment of the remaining principal balance of $1,512,500.
                The
                Mortgage Loan bears interest at the prime rate less 0.50% (currently
                7.75%) or LIBOR plus 2.25%. At June 30, 2007, the Company, under
                the terms
                of its agreement with North Fork Bank, elected to convert $1,700,000
                of
                the Term Loan and $2,875,000 of the Mortgage Loan from their prime
                rate
                base to LIBOR-based interest rate loans for one month at an interest
                rate
                of 7.57%, which expired July 18, 2007. The revolving line of credit,
                the
                Term Loan and the Mortgage Loan are secured by substantially all
                assets
                located within the United States and the pledge of 65% of the stock
                of the
                Company's subsidiaries located in Costa Rica and Canada. The provisions
                of
                the financing agreement require the Company to maintain certain financial
                covenants.


9




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





North
      Fork Bank and the Company amended the financing agreement, as of May 15, 2007,
      which (i) eliminates the fixed charge coverage ratio covenant for the quarter
      ending June 30, 2007, (ii) adds a covenant related to earnings before interest,
      taxes, depreciation and amortization (“EBITDA”) for the four quarters ending
      June 30, 2007 to require the Company to achieve a minimum level of EBITDA,
      and
      (iii) modifies the fixed charge coverage ratio covenant for periods after the
      quarter ending June 30, 2007. The Company was in compliance with these amended
      covenants at June 30, 2007.





On
      August
      9, 2007, North Fork Bank and Merrimac entered into a Pledge and Security
      Agreement, under which North Fork Bank consented to the guaranty by Merrimac
      of
      FMI's borrowings under the revolving credit agreement with The Bank of Nova
      Scotia in the amount of up to $250,000 (Canadian). In consideration for North
      Fork Bank providing such consent, Merrimac agreed to deposit $250,000 into
      a
      controlled collateral account with North Fork Bank and also agreed to prepay
      the
      mortgage loan portion of the credit facility with North Fork Bank with fifty
      percent of the proceeds from a sale of FMI up to a maximum amount of $500,000
      (see Note 16).





(B)
            FMI
                has an amended formula-based secured revolving credit agreement in
                place
                with The Bank of
                Nova Scotia to borrow up to $250,000 (Canadian) (approximately $235,000
                US) at the primerate
                plus 2 percent. Such agreement is guaranteed by Merrimac. No borrowings
                wereoutstanding
                under this agreement at June 30,
                2007.






FMI
      has a
      $336,000 (Canadian) (approximately $310,000 US) revolving lease line with the
      Bank of
      Nova
      Scotia, whereby the Company can obtain funding for previous production equipment purchases
      via a sale/leaseback transaction. As of June 30, 2007, $310,000 had been
      utilized under this facility. The Bank of Nova Scotia will not allow any new
      borrowings on this revolving lease line. Such leases are payable in monthly
      installments for up to five years and are secured by the related production
      equipment. Interest rates (typically prime rate plus 2.25 percent) are set
      at
      the closing of each respective sale/leaseback transaction. During the first
      quarter of 2006, FMI obtained $160,000 (US) in connection with the
      sale/leaseback of certain production equipment. The related equipment was
      originally purchased by the Company in 2005.





Assets
      securing capital leases included in property, plant and equipment, net, have
      a
      depreciated cost of approximately $694,000 (US) at June 30, 2007 and $703,000
      (US) at December 30, 2006.




10.
      WARRANTIES





The
      Company's products sold under contracts have warranty obligations. Estimated
      warranty costs for each contract are determined based on the contract terms
      and
      technology specific issues. The Company accrues estimated warranty costs at
      the
      time of sale and any additional amounts are recorded when such costs are
      probable and can be reasonably estimated. Warranty expense was approximately
      $4,000 and $62,000 for the quarters ended June 30, 2007 and July 1, 2006,
      respectively, and $52,000 and $97,000 for the six months ended June 30, 2007
      and
      July 1, 2006, respectively. The warranty reserve at June 30, 2007 and December
      30, 2006 was $228,000 and $256,000, respectively.





10




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





11.
      INCOME TAXES





The
      current tax benefit for the quarter and six months ended July 1, 2006 represents
      refundable Canadian provincial tax credits for which FMI, as a technology
      company, has qualified.





As
      of
      June 30, 2007, the Company has significant deferred tax assets resulting from
      net operating loss carryforwards, tax credit carryforwards and deductible
      temporary differences, which
      should reduce taxable income in future periods. A valuation allowance is
      required when management assesses that it is more likely than not that all
      or a
      portion of a deferred tax asset will not be realized. The Company's 2002, 2003
      and 2006 net losses have weighed heavily in the Company's overall assessments.
      The Company established a full valuation allowance for its remaining U.S. net
      deferred tax assets as a result of its assessment at December 28, 2002. This
      assessment continued unchanged from 2003 through the first six months of 2007.
      In 2006 the Company recorded additional valuation allowances for certain
      Canadian deferred tax assets of $427,000 because it believed that it was more
      likely than not that the deferred tax assets would not be realized. In
      conjunction with the determination that goodwill was impaired, as described
      in
      Note 7, and the continuing losses at FMI, the Company established a full
      valuation allowance of $506,000 during the second quarter of 2007 for its
      remaining Canadian net deferred tax asset.





The
      Code
      Section 382 places a limitation on the utilization of net operating loss
      carryforwards when an ownership change, as defined in the tax law, occurs.
      Generally, an ownership change occurs when there is a greater than 50 percent
      change in ownership. If such a change should occur, the actual utilization
      of
      net operating loss carryforwards, for tax purposes, would be limited annually
      to
      a percentage of the fair market value of the Company at the time of such change.
      The Company may become subject to these limitations in 2007 depending on the
      extent of the changes in its ownership.





12.
      BUSINESS SEGMENT DATA





The
      Company's operations are conducted primarily through two business segments:
      (1)
      electronic components and subsystems and (2) microwave micro-circuitry. These
      segments, and the principal operations of each, are as follows:





Electronic
      components and subsystems: Design, manufacture and sale of electronic component
      devices offering extremely broad frequency coverage and high performance
      characteristics for communications, defense and aerospace applications. Of
      the
      identifiable assets, 84% are located in the United States and 16% are located
      in
      Costa Rica. Included in such segment are the Multi-Mix® Microtechnology net
      assets.





Microwave
      micro-circuitry: Design, manufacture and sale of microstrip, bonded stripline
      and thick metal-backed Teflon® (PTFE) and mixed dielectric multilayer circuits
      for communications, defense
      and aerospace applications. All of the identifiable assets are located in
      Canada.





Information
      about the Company's operations in different areas of its business follows.
      Operating income is net sales less operating expenses. Operating expenses
      exclude interest expense, other income and income taxes. Corporate assets
      consist principally of cash and corporate expenses
      are immaterial. Intersegment sales and the resulting intersegment assets are
      principally due to intercompany sales from the microwave micro-circuitry segment
      to the electronic components and subsystems segment.




11


MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


Quarters
                  Ended
              
              Six
                  Months EndedJune
                  30,
              
              July
                  1,
              
              June
                  30,
              
              July
                  1,2007
              
              2006
              
              2007
              
              2006(In
                  thousands of dollars)
              
              (In
                  thousands of dollars)Industry
                  segments:Sales
                  to unaffiliated customers:Electronic
                  components and subsystems
              
              $
              5,371
              
              $
              7,102
              
              $
              9,883
              
              $
              11,784Microwave
                  micro-circuitry
              
              
              895
              
              
              1,180
              
              
              1,821
              
              
              2,826Intersegment
                  sales
              
              
              (41
              )
              
              (31
              )
              
              (55
              )
              
              (128
              )Consolidated
              
              $
              6,225
              
              $
              8,251
              
              $
              11,649
              
              $
              14,482Income
                  before income taxes:Operating
                  income (loss):Electronic
                  components and subsystems
              
              $
              55
              
              $
              697
              
              $
              (949
              )
              $
              70Microwave
                  micro-circuitry
              
              
              (2,947
              )
              
              (148
              )
              
              (3,164
              )
              
              23Interest
                  and other expense, net
              
              
              (71
              )
              
              (33
              )
              
              (114
              )
              
              (52
              )Consolidated
              
              $
              (2,963
              )
              $
              516
              
              $
              (4,227
              )
              $
              41Depreciation
                  and amortization:Electronic
                  components and subsystems
              
              $
              587
              
              $
              591
              
              $
              1,158
              
              $
              1,185Microwave
                  micro-circuitry
              
              
              70
              
              
              64
              
              
              134
              
              
              133Consolidated
              
              $
              657
              
              $
              655
              
              $
              1,292
              
              $
              1,318Capital
                  expenditures:Electronic
                  components and subsystems
              
              $
              355
              
              $
              418
              
              $
              756
              
              $
              956Microwave
                  micro-circuitry
              
              
              73
              
              
              9
              
              
              171
              
              
              23Consolidated
              
              $
              428
              
              $
              427
              
              $
              927
              
              $
              979
  June
                  30,
              
              July
                  1,2007
              
              2006Identifiable
                  assets:Electronic
                  components and subsystems
              
              $
              21,881
              
              $
              23,740Microwave
                  micro-circuitry
              
              
              3,570
              
              
              7,007Corporate
              
              
              2,817
              
              
              3,383Intersegment
              
              
              (168
              )
              
              (60
              )Consolidated
              
              $
              28,100
              
              $
              34,070




13.
      NET
      INCOME (LOSS) PER COMMON SHARE





Basic
      net
      income (loss) per common share is calculated by dividing net income (loss)
      by
      the weighted average number of common shares outstanding during the
      period.





The
      calculation of diluted net income (loss) per common share is similar to that
      of
      basic net income (loss) per common share, except that the denominator is
      increased to include the number of additional common shares that would have
      been
      outstanding if all potentially dilutive common shares, principally those
      issuable under stock options, were issued during the reporting period to the
      extent they are not anti-dilutive, using the treasury stock method.





The
      following table summarizes the calculation of basic and diluted net income
      per
      share:


Quarters
                  Ended
              
              Six
                  Months EndedJune
                  30,
              
              July
                  1,
              
              June
                  30,
              
              July
                  1,2007
              
              2006
              
              2007
              
              2006Net
                  income (loss) available to common stockholders
              
              $
              (3,468,923
              )
              $
              529,493
              
              $
              (4,732,725
              )
              $
              88,884Basic
                  net income per shareWeighted
                  average number of shares outstanding forbasic
                  net income per share-Common
                  stock
              
              
              2,910,711
              
              
              3,143,725
              
              
              3,003,513
              
              
              3,146,444Net
                  income per common share - basic
              
              $
              (1.19
              )
              $
              .17
              
              $
              (1.58
              )
              $
              .03Diluted
                  net income (loss) per shareWeighted
                  average number of shares outstanding fordiluted
                  net income (loss) per share:Common
                  stock
              
              
              2,910,711
              
              
              3,143,725
              
              
              3,003,513
              
              
              3,146,444Effect
                  of dilutive securities:Stock
                  options (1)
              
              
              -
              
              
              38,559
              
              
              -
              
              
              19,279Restricted
                  stock
              
              
              -
              
              
              1,038
              
              
              -
              
              
              520Weighted
                  average number of shares outstanding fordiluted
                  net income (loss) per share
              
              
              2,910,711
              
              
              3,183,322
              
              
              3,003,513
              
              
              3,166,243Net
                  income (loss) per common share - diluted
              
              $
              (1.19
              )
              $
              .17
              
              $
              (1.58
              )
              $
              .03


12




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





(1)
            Represents
                additional shares resulting from assumed conversion of stock options
                less
                shares purchased with the proceeds
                therefrom.





Diluted
      net income per share excludes 625,000 and 348,000 shares underlying stock
      options for
      the
      quarters ended June 30, 2007 and July 1, 2006, respectively, and 625,000 and
      348,000  shares
      underlying stock options for the six months ended June 30, 2007 and July 1,
      2006, respectively,
      as the exercise price of these options was greater than the average market value
      of
      the common shares, resulting in an anti-dilutive effect on net income
      per share.




14.
      RELATED PARTY TRANSACTIONS





In
      May
      1998, the Company sold 22,000 shares of Common Stock to Mason N. Carter,
      Chairman, President and Chief Executive Officer of the Company, at a price
      of
      $11.60 per share, which approximated the average closing price of the Company's
      Common Stock during the first quarter of 1998. The Company loaned Mr. Carter
      $255,000 in connection with the purchase of these shares and combined that
      loan
      with a prior loan to Mr. Carter in the amount of $105,000. The resulting total
      principal amount of $360,000 was payable May 4, 2003 and bore interest at a
      variable interest rate based on the prime rate. This loan was further amended
      on
      July 29, 2002. Accrued interest of $40,000 was added to the principal, bringing
      the new principal amount of the loan to $400,000, the due date was extended
      to
      May 4, 2006, and interest (at the same rate as was previously applicable) was
      now payable monthly. Mr. Carter pledged 33,000 shares of Common Stock as
      security for this loan, which was a full-recourse loan.





On
      March
      29, 2006, the Company entered into an agreement with Mr. Carter to purchase
      42,105 shares of the Company's common stock owned by Mr. Carter at a purchase
      price of $9.50 per share (the closing price of the common stock on March 29,
      2006) resulting in a total purchase price for the shares of $399,998. As a
      condition to the Company’s obligation to purchase the shares, concurrent with
      the Company’s payment of the purchase price Mr. Carter will pay to the Company
      $400,000 (plus any accrued and unpaid interest) in full satisfaction of Mr.
      Carter’s promissory note in favor of the Company dated July 29, 2002. This
      transaction was closed on April 24, 2006.





During
      the second quarter and first six months of 2007, the Company's outside general
      counsel Katten Muchin Rosenman LLP was paid $108,000 and $196,000, respectively,
      for providing legal services to the Company. During the second quarter and
      first
      six months of 2006, Katten Muchin Rosenman LLP was paid $94,000 and $187,000,
      respectively. A director of the Company is counsel to Katten Muchin Rosenman
      LLP
      but does not share in the fees that the Company pays to such law firm and his
      compensation is not based on such fees.




During
      2007 and 2006 the Company retained Career Consultants, Inc. and SK Associates
      to
      perform executive searches and to provide other services to the Company. The
      Company paid an aggregate of $5,000 and $21,000 to these companies during the
      second quarter and first six months of 2007, respectively. The Company paid
      an
      aggregate of $4,000 and $6,000 to these companies during the second quarter
      and
      first six months of 2006, respectively. A director of the Company is the
      chairman and chief executive officer of these companies.





During
      the second quarter and first six months of 2007, a director of the Company
      was
      paid $9,000 and $18,000, respectively, for providing technology-related
      consulting services to the Company. For the second quarter and first six months
      of 2006, such director was paid $9,000 and $18,000, respectively.





During
      the second quarter and first six months of 2006, DuPont Electronic Technologies
      (“DuPont”), a stockholder and the employer of a director, was paid $12,000 and
      $27,000, respectively, for providing technological and marketing-related
      personnel and services on a cost-sharing basis to the Company under the
      Technology Agreement dated February 28, 2002. No payments were made to DuPont
      during the second quarter and first six months of 2007. A director of the
      Company is an officer of DuPont, but does not share in any of these
      payments.





Each
      director who is not an employee of the Company receives a monthly director's
      fee
      of $1,500, plus an additional $500 for each meeting of the Board and of any
      Committees of the Board attended. In addition, the Chair of the Audit Committee
      receives an annual fee of $2,500 for his services in such capacity. The
      directors are also reimbursed for reasonable travel expenses incurred in
      attending Board and Committee meetings. In addition, pursuant to the 2006 Stock
      Option Plan, each non-employee director is granted an option to purchase 2,500
      shares of the Common Stock of the Company on the date of each Annual Meeting
      of
      Stockholders. Such options have a three-year vesting period. Each such grant
      has
      an exercise price equal to the fair market value on the date of such grant
      and
      will expire on the tenth anniversary of the date of the grant. On June 20,
      2007,
      non-qualified stock options to purchase an aggregate of 20,000 shares were
      issued to eight directors at an exercise price of $9.78 per share.




13




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





Also
      on
      June 20, 2007, pursuant to the 2006 Non-Employee Directors’ Stock Plan, 10,500
      shares of restricted stock were granted to seven directors at a fair market
      value of $9.78 per share. Such restricted stock vests ratably over a three-year
      period.





On
      December 13, 2004, Infineon Technologies AG (“Infineon”), at such time the
      beneficial owner of approximately 15% of the Company’s common stock, sold
      475,000 shares of the Company’s common stock to four purchasers in a
      privately-negotiated transaction. Two purchasers in such transaction, K
      Holdings, LLC and Hampshire Investments, Limited, each of which is affiliated
      with Ludwig G. Kuttner, who was President and Chief Executive Officer of
      Hampshire Group, Limited (“Hampshire”), purchased 300,000 shares representing an
      aggregate of approximately 9.6% of the Company’s common stock. Mr. Kuttner was
      elected to the Company’s Board of Directors at its 2006 Annual Meeting of
      Stockholders. As a result of an ongoing investigation by Hampshire's audit
      committee, the Securities and Exchange Commission, and the Department of Justice
      of allegations of certain improprieties and possibly unlawful conduct involving
      Mr. Kuttner and other Hampshire executives, Mr. Kuttner's employment with
      Hampshire has been terminated and he remains as a director. Mr. Kuttner took
      a
      leave of absence from his position as a director of Merrimac. During his leave
      of absence, Mr. Kuttner was not entitled to any compensation from the Company.
      Mr. Kuttner rescinded his leave of absence from his position as a director
      of
      Merrimac as of June 20, 2007. Infineon also assigned to each purchaser certain
      registration rights to such shares under the existing registration rights
      agreements Infineon had with the Company. In connection with the transaction,
      the Company and Infineon terminated the Stock Purchase and Exclusivity Letter
      Agreement dated April 7, 2000, as amended, which provided that the Company
      would
      design, develop and produce exclusively for Infineon certain Multi-Mix® products
      that incorporate active RF power transistors for use in certain wireless base
      station applications, television transmitters and certain other applications
      that are intended for Bluetooth transceivers.





DuPont
      and the four purchasers above hold registration rights which currently give
      them
      the right to register an aggregate of 1,003,413 shares of Common Stock of the
      Company.





15.
      REPURCHASE OF COMMON STOCK





On
      March
      13, 2007, the Company repurchased in a private transaction 238,700 shares of
      its
      Common Stock for the treasury at $9.00 per share for an aggregate total of
      $2,148,300 from a group of investors. The Company also announced that it amended
      its 1999 Stockholder Rights Plan by increasing the defined “Acquiring Person”
threshold to 12.5 percent from 10 percent.





16.
      SUBSEQUENT EVENT





Company
      management has determined, and the Board of Directors has approved on August
      9,
      2007, that the Company should divest its FMI operations and is in the process
      of
      seeking interested parties. The potential divestiture should enable Merrimac
      Industries, Inc. to concentrate its resources on RF Microwave and Multi-Mix®
Microtechnology product lines to generate sustainable, profitable growth.
      Beginning with the third quarter of 2007, the Company will reflect FMI as a
      discontinued operation and the Company intends to restate prior financial
      statements to reflect the results of operations, cash flows and financial
      position of FMI as discontinued operations. At
      June
      30, 2007 the major classes of assets and liabilities for FMI were as
      follows:


Current
                  assets
              
              $
              1,187,000Property,
                  plant and equipment, net
              
              $
              1,364,000Goodwill
              
              $
              1,163,000Current
                  liabilities
              
              $
              954,000Long-term
                  debt
              
              $
              240,000




14




ITEM
      2.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





FORWARD-LOOKING
      STATEMENTS




This
      Quarterly Report on Form 10-Q contains statements relating to future results
      of
      Merrimac ) (including certain projections and business trends) that are
      "forward-looking statements" as defined in the Private Securities Litigation
      Reform Act of 1995. In this report, the words “we”, “us” and “our” refer to
      Merrimac and its subsidiaries. Actual results may differ materially from those
      projected as a result of certain risks and uncertainties. These risks and
      uncertainties include, but are not limited to: risks associated with demand
      for
      and market acceptance of existing and newly developed products as to which
      the
      Company has made significant investments, particularly its Multi-Mix® products;
      the possibilities of impairment charges to the carrying value of our Multi-Mix®
assets, thereby resulting in charges to our earnings; risks associated with
      adequate capacity to obtain raw materials and reduced control over delivery
      schedules and costs due to reliance on sole source or limited suppliers; slower
      than anticipated penetration into the satellite communications, defense and
      wireless markets; failure of our Original Equipment Manufacturer, or OEM,
      customers to successfully incorporate our products into their systems; changes
      in product mix resulting in unexpected engineering and research and development
      costs; delays and increased costs in product development, engineering and
      production; reliance on a small number of significant customers; the emergence
      of new or stronger competitors as a result of consolidation movements in the
      market; the timing and market acceptance of our or our OEM customers’ new or
      enhanced products; general economic and industry conditions; the risk that
      the
      benefits expected from the Company’s acquisition of Filtran Microcircuits Inc.
      are not realized; the ability to protect proprietary information and technology;
      competitive products and pricing pressures; our ability and the ability of
      our
      OEM customers to keep pace with the rapid technological changes and short
      product life cycles in our industry and gain market acceptance for new products
      and technologies; foreign currency fluctuations between the U.S. and Canadian
      dollars; risks relating to governmental regulatory actions in communications
      and
      defense programs; and inventory risks due to technological innovation and
      product obsolescence, as well as other risks and uncertainties as are detailed
      from time to time in the Company's Securities and Exchange Commission filings.
      These forward-looking statements are made only as of the date of the filing
      of
      this Form 10-Q, and the Company undertakes no obligation to update or revise
      the
      forward-looking statements, whether as a result of new information, future
      events or otherwise.




OVERVIEW





Merrimac
      is involved in the design, manufacture and sale of electronic component devices
      offering extremely broad frequency coverage and high performance
      characteristics, and microstrip, bonded stripline and thick metal-backed Teflon®
(PTFE) and mixed dielectric multilayer circuits for communications, defense
      and
      aerospace applications. The Company's operations are conducted primarily through
      two business segments: (1) electronic components and subsystems and (2)
      microwave micro-circuitry (through its subsidiary, FMI).





The
      following table provides a breakdown of our sales between these segments for
      the
      quarters and six months ended June 30, 2007 and July 1, 2006:




Quarters
                  EndedJune
                  30, 2007
              
              July
                  1, 2006$
              
              
              %
                  of sales
              
              
              $
              
              
              %
                  of salesElectronic
                  componentsand
                  subsystems
              
              $
              5,371,000
              
              
              86.3
              %
              $
              7,102,000
              
              
              86.1
              %Microwave
                  micro-circuitry(1)
              
              
              895,000
              
              
              14.4
              %
              
              1,180,000
              
              
              14.3
              %Intersegment
                  sales
              
              
              (41,000
              )
              
              (0.7
              )%
              
              (31,000
              )
              
              (0.4
              )%Consolidated
              
              $
              6,225,000
              
              
              100.0
              %
              $
              8,251,000
              
              
              100.0
              %
 
 Six
                  Months EndedJune
                  30, 2007
              
              July
                  1, 2006$
              
              %
                  of sales
              
              $
              
              %
                  of salesElectronic
                  componentsand
                  subsystems
              
              $
              9,883,000
              
              
              84.8
              %
              $
              11,784,000
              
              
              81.4
              %Microwave
                  micro-circuitry(1)
              
              
              1,821,000
              
              
              15.6
              %
              
              2,826,000
              
              
              19.5
              %Intersegment
                  sales
              
              
              (55,000
              )
              
              (0.4
              )%
              
              (128,000
              )
              
              (0.9
              )%Consolidated
              
              $
              11,649,000
              
              
              100.0
              %
              $
              14,482,000
              
              
              100.0
              %
  (1)
          Substantially all conducted by our Canadian subsidiary,
          FMI.


15




Merrimac
      is a versatile technologically-oriented company specializing in miniature radio
      frequency lumped-element components, integrated networks, microstrip and
      stripline microwave components, subsystem assemblies and ferrite attenuators.
      Of
      special significance has been the combination of two or more of these
      technologies into single components to achieve superior performance and
      reliability while minimizing package size and weight. Merrimac components are
      today found in applications as diverse as satellites, military and commercial
      aircraft, radar, cellular radio systems, medical and dental diagnostic
      instruments and wireless Internet connectivity. Merrimac's components range
      in
      price from $0.50 to more than $10,000 and its subsystem assemblies range from
      $500 to more than $1,500,000.





The
      Company’s operations for the second quarter of 2007 were negatively impacted by
      a non-cash goodwill impairment charge of $2,630,000 to the FMI reporting unit.
      During the quarter ended June 30, 2007, the Company conducted an interim
      goodwill impairment test of its FMI reporting unit. This occurred as a result
      of
      FMI’s failure to meet 2007 bookings and sales targets, which resulted in
      continuing operating losses and a reduction of its bank borrowing availability.
      During the first six months of 2007, such goodwill amount increased $189,000
      to
      $3,693,000 resulting from the Canadian dollar increase from $0.86 at December
      30, 2006 to $0.94 at the end of June. The stronger Canadian dollar has an
      unfavorable impact on FMI’s cost structure and upon its U.S. dollar denominated
      export sales, which were approximately 75% of FMI’s sales during the first six
      months of 2007.





In
      conjunction with the determination that goodwill was impaired and the continuing
      losses at FMI, the Company established a full valuation allowance of $506,000
      during the second quarter of 2007 for its Canadian net deferred tax asset as
      management believed that it is more likely than not that its deferred tax asset
      will not be realized.





Sales
      for
      the electronic components and subsystems segment for the second quarter of
      2007
      were lower than the second quarter of 2006 due to both the shipment of a
      $750,000 order to a significant military customer and $1,200,000 of revenue
      recognized in connection with the early close out of a fixed price customer
      contract which took place in 2006 and did not recur in the second quarter of
      2007. Orders of $9,974,000 received during the second quarter of 2007 and
      $16,459,000 received during the first six months of 2007 were both Company
      records. Backlog increased by $4,810,000 or 38.8% to $17,195,000 at the end
      of
      the second quarter of 2007. The June 30, 2007 backlog is a record for the
      highest quarter-end backlog the Company has achieved.





The
      Company markets and sells its products domestically and internationally through
      a direct sales force and manufacturers’ representatives. Merrimac has
      traditionally developed and offered for sale products built to specific customer
      needs, as well as standard catalog items.





Cost
      of
      sales for the Company consists of materials, salaries and related expenses,
      and
      outside services for manufacturing and certain engineering personnel and
      manufacturing overhead. Our products are designed and manufactured in the
      Company’s facilities. The Company’s manufacturing and production facilities
      infrastructure overhead are relatively fixed and are based on its expectations
      of future net revenues. Should the Company experience a reduction in net
      revenues in a quarter, it could have difficulty adjusting short-term
      expenditures and absorbing any excess capacity expenses. If this were to occur,
      the Company’s operating results for that quarter would be negatively impacted.
      In order to remain competitive, the Company must continually reduce its
      manufacturing costs through design and engineering innovations and increases
      in
      manufacturing efficiencies. There can be no assurance that the Company will
      be
      able to reduce its manufacturing costs.





The
      Company anticipates that depreciation and amortization expenses will exceed
      capital expenditures in fiscal year 2007 by approximately $300,000. The Company
      intends to issue commitments to purchase $1,500,000 of capital equipment from
      various vendors for the remainder of 2007. The Company anticipates that such
      equipment will be purchased and become operational during the remainder of
      2007.
      The Company’s planned equipment purchases and other commitments are expected to
      be funded through cash resources and cash flows expected to be generated from
      operations, and supplemented by the Company’s $5,000,000 revolving credit
      facility, which expires October 18, 2008.





Selling,
      general and administrative expenses consist of personnel costs for
      administrative, selling and marketing groups, sales commissions to employees
      and
      manufacturing representatives, travel, product marketing and promotion costs,
      as
      well as legal, accounting, information technology and other administrative
      costs. As discussed below, the Company expects to continue to make significant
      and increasing expenditures for selling, general and administrative expenses,
      especially in connection with implementation of its strategic plan for
      generating and expanding sales of Multi-Mix® products.





16





Research
      and development expenses consist of materials, salaries and related expenses
      of
      certain engineering personnel, and outside services related to product
      development projects. The Company charges all research and development expenses
      to operations as incurred. The Company believes that continued investment in
      research and development is critical to the Company’s long-term business
      success. The Company intends to continue to invest in research and development
      programs in future periods, and expects that these costs will increase over
      time, in order to develop new products, enhance performance of existing products
      and reduce the cost of current or new products.





The
      Company expects that its defense and satellite customers should continue to
      maintain their approximate current levels of orders during fiscal year 2007,
      though there are no assurances they will do so. Nevertheless, in times of armed
      conflict or war, military spending is concentrated on armaments build up,
      maintenance and troop support, and not on the research and development and
      specialty applications that are the Company’s core strengths and revenue
      generators. The Company also anticipates increased levels of orders during
      fiscal year 2007 for its Multi-Mix® Microtechnology products, based on inquiries
      from existing customers, requests to quote from prospective and existing
      customers and market research.





CRITICAL
      ACCOUNTING ESTIMATES AND POLICIES





The
      Company's management makes certain assumptions and estimates that impact the
      reported amounts of assets, liabilities and stockholders' equity, and revenues
      and expenses. The management judgments that are currently the most critical
      are
      related to the accounting for the Company's investments in Multi-Mix®
Microtechnology, contract revenue recognition, inventory valuation, valuation
      of
      goodwill and valuation of deferred tax assets.





Impairment
      of long-lived assets





Following
      is a summary of the carrying amounts of the Multi-Mix® Microtechnology net
      assets included in the Company's consolidated financial statements at June
      30,
      2007 and the related future planned purchases and lease obligation commitments
      through January 2011.




Net
                assets:Property,
                plant and equipment, at cost
            
            $
            14,904,000Less
                accumulated depreciation and amortization
            
            
            8,700,000Property,
                plant and equipment, net
            
            
            6,204,000Inventories
            
            
            509,000Other
                assets, net
            
            
            164,000Total
                net assets at June 30, 2007
            
            
            6,877,000Commitments:Planned
                equipment purchases for the remainder of 2007
            
            
            550,000Lease
                obligations through January 2011
            
            
            675,000Total
                commitments
            
            
            1,225,000Total
                net assets and commitments
            
            $
            8,102,000





Approximately
      35% of the property, plant and equipment may be utilized in other areas of
      our
      electronic components and subsystems operations.





Any
      future demand for Multi-Mix® for the wireless market is dependent on various
      third-party programs and is directly related to the timing of our customers’ and
      potential customers’ phase-out of existing programs and their migration, which
      is not assured and has not yet commenced commercially, toward new programs
      to
      meet their customers’ new requirements. While these circumstances have resulted
      in the delay or cancellation of Multi-Mix® Microtechnology product purchases
      that had been anticipated from certain specific customers or programs, the
      Company has implemented a strategic plan utilizing product knowledge and
      customer focus to expand specific sales opportunities. However, continued
      extended delay or reduction from planned levels in new orders expected from
      customers for these products could require the Company to pursue alternatives
      related to the utilization or realization of these assets and commitments,
      the
      net result of which could be materially adverse to the financial results and
      position of the Company. In accordance with the Company’s evaluation of
      Multi-Mix® under SFAS No. 144, the Company has determined no provision for
      impairment is required at this time. Management will continue to monitor the
      recoverability of the Multi-Mix® assets.





Contract
      Revenue Recognition





The
      Company recognizes revenue in accordance with the provisions of Staff Accounting
      Bulletin No. 104. Contract revenue and related costs on fixed-price and
      cost-reimbursement contracts that require customization of products to customer
      specifications are recorded when title transfers to the customer, which is
      generally on the date of shipment. Prior to shipment, manufacturing costs
      incurred on such contracts are recorded as work-in-process inventory.
      Anticipated losses on contracts are charged to operations when identified.
      Revenue related to non-recurring engineering charges is generally recognized
      upon shipment of the related initial units produced or based upon contractually
      established stages of completion.




17





The
      cost
      rates utilized for cost-reimbursement contracts are subject to review by third
      parties and can be revised, which can result in additions to or reductions
      from
      revenue. Revisions which result in reductions to revenue are recognized in
      the
      period that the rates are reviewed and finalized; additions to revenue are
      recognized in the period that the rates are reviewed, finalized, accepted by
      the
      customer, and collectability from the customer is assured. The Company submits
      financial information regarding the cost rates on cost-reimbursement contracts
      for each fiscal year in which the Company performed work on cost-reimbursement
      contracts. The Company does not record any estimates on a regular basis for
      potential revenue adjustments, as there currently is no reasonable basis on
      which to estimate such adjustments given the Company’s very limited experience
      with these contracts. $250,000 of revenue was recognized related to cost
      reimbursement contracts during the second quarter and first six months of 2006.
      No revenue was recognized related to cost-reimbursement contracts during the
      second quarter and first six months of 2007.





Inventory
      Valuation





Inventories
      are valued at the lower of average cost or market. Inventories are periodically
      reviewed for their projected manufacturing usage utilization and, when
      slow-moving or obsolete inventories are identified, a provision for a potential
      loss is made and charged to operations. Total inventories are net of valuation
      allowances for obsolescence and cost overruns of $1,432,000 at June 30, 2007
      and
      $1,174,000 at December 30, 2006. The Company recorded provisions for
      obsolescence and cost overruns of $154,000 and $80,000 for the quarters ended
      June 30, 2007 and July 1, 2006, respectively, and $178,000 and $100,000 for
      the
      six months ended June 30, 2007 and July 1, 2006, respectively.





Procurement
      of inventory is based on specific customer orders and forecasts. Customers
      have
      certain rights of modification with respect to these orders and forecasts.
      As a
      result, customer modifications to orders and forecasts affecting inventory
      previously procured by us and our purchases of inventory beyond customer needs
      may result in excess and obsolete inventory for the related customers. Although
      the Company may be able to use some of these excess components and raw materials
      in other products it manufactures, a portion of the cost of this excess
      inventory may not be recoverable from customers, nor may any excess quantities
      be returned to the vendors. The Company also may not be able to recover the
      cost
      of obsolete inventory from vendors or customers.





Write
      offs or write downs of inventory generally arise from:




·
            declines
                in the market value of inventory;




·
            changes
                in customer demand for inventory, such as cancellation of orders;
                and




·
            our
                purchases of inventory beyond customer needs that result in excess
                quantities on hand that we are not able to return to the vendor or
                charge
                back to the customer.





Valuation
      of Goodwill





With
      the
      adoption of SFAS No. 142 by the Company on December 30, 2001, goodwill is no
      longer subject to amortization over its estimated useful life. However, goodwill
      is subject to at least an annual assessment for impairment and more frequently
      if circumstances indicate a possible impairment. The Company performed an
      interim goodwill impairment test during the second quarter of 2007 and compared
      the fair value of FMI’s assets, including goodwill, to its carrying value and
      determined the carrying value of FMI exceeded its fair value. The Company has
      recorded a non-cash impairment charge of approximately $2,630,000 to operations
      for the quarter ended June 30, 2007. The impairment charge does not affect
      the
      Company’s liquidity and has not resulted in non-compliance with any debt
      covenants. If actual market conditions differ or forecasts change at the time
      of
      the annual assessment in the fourth quarter of 2007, the Company may be required
      to record an additional goodwill impairment charge.





Valuation
      of Deferred Tax Assets





As
      of
      June 30, 2007, the Company has significant deferred tax assets resulting from
      net operating loss carryforwards, tax credit carryforwards and deductible
      temporary differences, which should reduce taxable income in future periods.
      A
      valuation allowance is required when management assesses that it is more likely
      than not that all or a portion of a deferred tax asset will not be realized.
      The
      Company's 2002, 2003 and 2006 net losses have weighed heavily in the Company's
      overall assessments. The Company established a full valuation allowance for
      its
      remaining U.S. net deferred tax assets as a result of its assessment at December
      28, 2002. This assessment continued unchanged from 2003 through the first six
      months of 2007. In 2006 the Company recorded additional valuation allowances
      for
      certain Canadian deferred tax assets of $427,000 because it believed that it
      was
      more likely than not that the deferred tax assets would not be realized. In
      conjunction with the determination that goodwill was impaired, as described
      in
      Note 7, and the continuing losses at FMI, the Company established a full
      valuation allowance of $506,000 during the second quarter of 2007 for its
      remaining Canadian net deferred tax asset.




18





CONSOLIDATED
      STATEMENTS OF OPERATIONS SUMMARY


(UNAUDITED)





The
      following table reflects the percentage relationships of items from the
      Consolidated Statements of Operations as a percentage of net sales.


Percentage
                  of Net Sales
              
              Percentage
                  of Net SalesQuarters
                  Ended
              
              Six
                  Months EndedJune
                  30,
              
              July
                  1,
              
              June
                  30,
              
              July
                  1,2007
              
              2006
              
              2007
              
              2006Net
                  sales
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Costs
                  and expenses:Cost
                  of sales
              
              
              61.7
              
              
              55.0
              
              
              64.3
              
              
              57.8Selling,
                  general and administrative
              
              
              36.7
              
              
              32.0
              
              
              41.0
              
              
              35.5Research
                  and development
              
              
              5.8
              
              
              6.3
              
              
              7.5
              
              
              6.1Goodwill
                  impairment charge
              
              
              42.2
              
              
              -
              
              
              22.6
              
              
              -146.4
              
              
              93.3
              
              
              135.4
              
              
              99.4Operating
                  income
              
              
              (46.4
              )
              
              6.7
              
              
              (35.4
              )
              
              .6Interest
                  and other expense, net
              
              
              (1.1
              )
              
              (.4
              )
              
              (1.0
              )
              
              (.3
              )Income
                  before income taxes
              
              
              (47.5
              )
              
              6.3
              
              
              (36.4
              )
              
              .3Provision
                  (benefit) for income taxes
              
              
              8.1
              
              
              (.1
              )
              
              4.3
              
              
              (.3
              )Net
                  income
              
              
              (55.6
              )%
              
              6.4
              %
              
              (40.7
              )%
              
              .6
              %


**SECOND
      QUARTER AND FIRST SIX MONTHS OF 2007 COMPARED TO THE SECOND QUARTER AND FIRST
      SIX MONTHS OF 2006**





*Net
      sales.*





Consolidated
      results of operations for the second quarter of 2007 reflect a decrease in
      net
      sales from the second quarter of 2006 of $2,026,000 or 24.6% to $6,225,000.
      The
      decrease was attributable to a $1,731,000 decrease in net sales of electronic
      components and subsystems and a $285,000 decrease in sales of microwave
      micro-circuitry products from FMI and a $10,000 increase of intersegment sales.
      Sales for the electronic components and subsystems segment for the second
      quarter of 2006 included both the shipment of a $750,000 order to a significant
      military customer and $1,200,000 of revenue recognized in connection with the
      early close out of a fixed price customer contract which did not recur in the
      second quarter of 2007. Consolidated results of operations for the first six
      months of 2007 reflect a decrease in net sales from the first six months of
      2006
      of $2,832,000 or 19.6% to $11,649,000. The decrease was attributable to a
      $1,901,000 decrease in net sales of electronic components and subsystems and
      a
      $1,005,000 decrease in sales of microwave micro-circuitry products from FMI
      and
      a $73,000 decrease of intersegment sales. Sales for the electronic components
      and subsystems segment for the first six months of 2006 included both the
      shipment of a $750,000 order to a significant military customer and $1,200,000
      of revenue recognized in connection with the early close out of a fixed price
      customer contract mentioned above which did not recur in the first six months
      of
      2007.





The
      decrease in sales of the microwave micro-circuitry segment for the second
      quarter and first six months of 2007 was due to a reduced beginning of the
      year
      backlog and weakness in first quarter 2007 orders.





Backlog
      represents the amount of orders the Company has received that have not been
      shipped as of the end of a particular fiscal period. The orders in backlog
      are a
      measure of future sales and determine the Company’s upcoming material, labor and
      service requirements. The book-to-bill ratio for a particular period represents
      orders received for that period divided by net sales for the same period. The
      Company looks for this ratio to exceed 1.0, indicating the backlog is being
      replenished by new orders at a higher rate than the sales being removed from
      the
      backlog.




19


The
      following table presents key performance measures that we use to monitor our
      operating results for the six months ended June 30, 2007 and July 1,
      2006:





2007
            
            2006Beginning
                backlog
            
            $
            12,385,000
            
            $
            13,139,000Plus
                bookings
            
            
            16,459,000
            
            
            12,864,000Less
                net sales
            
            
            11,649,000
            
            
            14,482,000Ending
                backlog
            
            $
            17,195,000
            
            $
            11,521,000Book-to-bill
                ratio
            
            
            1.41
            
            
            0.89





Orders
      of
      $9,974,000 were received during the second quarter of 2007, an increase of
      $1,055,000 or 11.8% compared to $8,919,000 in orders received during the second
      quarter of 2006. Orders of $16,459,000 were received during the first six months
      of 2007, an increase of $3,595,000 or 27.9% compared to $12,864,000 in orders
      received during the first six months of 2006. Backlog increased by $4,810,000
      or
      38.8% to $17,195,000 at the end of the second quarter of 2007 compared to
      $12,385,000 at year-end 2006, due to the increased orders received during the
      second quarter. The book-to-bill ratio for the second quarter of 2007 was 1.60
      to 1 and for the second quarter of 2006 was 1.08 to 1. The book-to-bill ratio
      for the first six months of 2007 was 1.41 to 1 and for the first six months
      of
      2006 was 0.89 to 1.





*Cost
      of sales and Gross profit.*





The
      following table provides comparative gross profit information, by product
      segment, between the quarters and six months ended June 30, 2007 and July 1,
      2006.




Quarter
                ended June 30, 2007
            
            Quarter
                ended July 1, 2006$
            
            Increase/
              (Decrease)
                from prior period
            
            %
                of
              Segment
              Net
                Sales
            
            $
            
            Increase/
              (Decrease)
                from prior period
            
            %
                of
              Segment
              Net
                SalesElectronic
                Components andSubsystems
                gross profit
            
            $
            2,367,000
            
            $
            (1,143,000
            )
            
            44.1%
            
            $
            3,510,000
            
            $
            738,000
            
            
            49.4
            %MicrowaveMicro-Circuitry
                gross profit
            
            $
            16,000
            
            $
            (184,000
            )
            
            1.8%
            
            $
            200,000
            
            $
            (296,000
            )
            
            16.9
            %Consolidatedgross
                profit
            
            $
            2,383,000
            
            $
            (1,327,000
            )
            
            38.3%
            
            $
            3,710,000
            
            $
            442,000
            
            
            45.0
            %




Six
                Months ended June 30, 2007
            
            Six
                Months ended July 1, 2006$
            
            Increase/
              (Decrease)
                from prior period
            
            %
                of
              Segment
              Net
                Sales
            
            $
            
            Increase/
              (Decrease)
                from prior period
            
            %
                of
              Segment
              Net
                SalesElectronic
                Components andSub-assemblies
                gross profit
            
            $
            4,064,000
            
            $
            (1,315,000
            )
            
            41.1%
            
            $
            5,379,000
            
            $
            (65,000
            )
            
            45.6
            %MicrowaveMicro-Circuitrygross
                profit
            
            $
            100,000
            
            $
            (633,000
            )
            
            5.5%
            
            $
            733,000
            
            $
            (126,000
            )
            
            25.9
            %Consolidatedgross
                profit
            
            $
            4,164,000
            
            $
            (1,948,000
            )
            
            35.7%
            
            $
            6,112,000
            
            $
            (191,000
            )
            
            42.2
            %





20


The
      decrease in gross profit and gross profit percentage for the second quarter
      and
      first six months of 2007 for both segments of the Company was due to the impact
      of the lower level of sales having to absorb fixed manufacturing costs. Gross
      profit for the second quarter of 2006 for the electronic components and
      subsystems segment included $1,060,000 from the early close out of a fixed
      price
      customer contract.





Depreciation
      expense included in consolidated cost of sales for the second quarter of 2007
      was $599,000, an increase of $17,000 compared to the second quarter of 2006.
      Depreciation expense included in consolidated cost of sales for the first six
      months of 2007 was $1,179,000, a decrease of $10,000 compared to the first
      six
      months of 2006. For the second quarter and first six months of 2007,
      approximately $383,000 and $758,000, respectively, of depreciation expense
      was
      associated with Multi-Mix® Microtechnology capital assets. For the second
      quarter and first six months of 2006, approximately $373,000 and $740,000,
      respectively of depreciation expense was associated with Multi-Mix®
Microtechnology capital assets.





FMI
      sales
      include intersegment sales of $41,000 and $31,000 in the second quarter of
      2007
      and 2006, respectively, and include intersegment sales of $55,000 and $128,000
      in the first six months of 2007 and 2006, respectively.





*Selling,
      general and administrative expenses.*





Selling,
      general and administrative expenses of $2,284,000 for the second quarter of
      2007
      decreased by $361,000 or 13.6%, and when expressed as a percentage of net sales,
      increased by 4.7 percentage points to 36.7% compared to the second quarter
      of
      2006. The decrease in such expenses for the second quarter of 2007 was due
      to
      lower commissions on the reduced sales level and lower marketing and
      administrative costs. Selling, general and administrative expenses of $4,775,000
      for the first six months of 2007 decreased by $356,000 or 6.9%, and when
      expressed as a percentage of net sales, increased 5.5 percentage points to
      41.0%
      compared to the first six months of 2006. The decrease in such expenses for
      the
      first six months of 2007 was due to lower commissions on the reduced sales
      level
      and lower marketing and administrative costs.





*Research
      and development expenses.*





Research
      and development expenses for new products were $361,000 for the second quarter
      of 2007, a decrease of $155,000 or 30.1%, and when expressed as a percentage
      of
      net sales, decreased by 0.5 percentage points to 5.8% compared to the second
      quarter of 2006. Except for $25,000 of expenses at FMI (a decrease of $7,000
      from such FMI expenses in the second quarter of 2006) substantially all of
      the
      research and development expenses were related to Multi-Mix® Microtechnology
      products. Research and development expenses for new products were $872,000
      for
      the first six months of 2007, a decrease of $16,000 or 1.9%, and when expressed
      as a percentage of net sales, increased by 1.4 percentage points to 7.5%
      compared to the first six months of 2006. Except for $52,000 of expenses at
      FMI
      (a decrease of $12,000 from such FMI expenses in the first six months of 2006)
      substantially all of the research and development expenses were related to
      Multi-Mix® Microtechnology products. The Company anticipates that these expenses
      will increase in future periods in connection with implementation of our
      strategic plan for Multi-Mix®.





*Goodwill
      impairment charge* .





During
      the quarter ended June 30, 2007, the Company conducted an interim goodwill
      impairment test of its FMI reporting unit. This occurred as a result of FMI’s
      failure to meet 2007 bookings and sales targets, which resulted in continuing
      operating losses and a reduction of its bank borrowing availability. FMI’s
      goodwill balance has increased since its acquisition in 1999 from the continued
      strengthening of the Canadian dollar versus the U.S. dollar. During the first
      six months of 2007, such goodwill amount increased $189,000 to $3,693,000
      resulting from the Canadian dollar increase from $0.86 at December 30, 2006
      to
      $0.94 at the end of June. The stronger Canadian dollar has an unfavorable impact
      on FMI’s cost structure and upon its U.S. dollar denominated export sales, which
      were approximately 75% of FMI’s sales during the first six months of 2007. As a
      result of the impairment test, the Company recorded a non-cash goodwill
      impairment charge of $2,630,000 to the FMI reporting unit  during
      the quarter ended June 30, 2007. After
      the
      impairment charge, the remaining FMI goodwill balance is approximately
      $1,063,000.





21


*Operating
      income (loss).*





Consolidated
      operating loss for the second quarter of 2007 was $2,892,000 compared to
      consolidated operating income of $549,000 for the second quarter of 2006.
      Consolidated operating loss for the second quarter of 2007 included a
      $2,630,000 non-cash charge related to a partial impairment of goodwill recorded
      in connection with the Company’s 1999 acquisition of FMI. Excluding the
      $2,630,000 goodwill impairment charge, the remaining o perating
      loss for the second quarter of 2007 was due to the lower gross profit caused
      by
      the decrease in sales, partially offset by decreased research and development
      costs and administrative costs. The
      higher consolidated operating income for the second quarter of 2006 was due
      to
      revenue recognized as a result of the early contract close out previously
      mentioned.





Consolidated
      operating loss for the first six months of 2007 was $4,113,000 compared to
      consolidated operating income of $93,000 for the first six months of 2006.
      Consolidated operating loss for the first six months of 2007 included a
      $2,630,000 non-cash charge related to a partial impairment of goodwill. Excluding
      the $2,630,000 impairment charge, the reduction in the remaining operating
      income for the first six months of 2007 as compared to the first six months
      of
      2006 was due to the lower gross profit caused by the decrease in sales,
      partially offset by decreased selling, general and administrative expenses
      compared to the first six months of 2006.





For
      the
      second quarter of 2007, the Company's operating income for its electronic
      components and subsystems segment was $55,000 compared to operating income
      of
      $697,000 for the second quarter of 2006. The operating income for the second
      quarter of 2006 for the electronic components and subsystems segment was higher
      due to the increase
      in gross profit resulting from revenue recognized as a result of the early
      contract close out mentioned above which did not recur in 2007. For the second
      quarter of 2007, operating loss for the microwave micro-circuitry segment was
      $2,947,000 compared to operating loss of $148,000 for the second quarter of
      2005. The increased operating loss for the microwave micro-circuitry segment
      was
      due to a
      $2,630,000 non-cash charge related to a partial impairment of
      goodwill.





For
      the
      first six months of 2007 the Company's operating loss for its electronic
      components and subsystems segment was $949,000 compared to operating income
      of
      $70,000 for the first six months of 2006. The increased operating loss for
      the
      electronic components and subsystems segment was due to the segment’s lower
      gross profit from lower sales, partially offset by decreased selling, general
      and administrative as compared to the first six months of 2006. For the first
      six months of 2007, operating loss for the microwave micro-circuitry segment
      was
      $3,164,000 compared to operating income of $23,000 for the first six months
      of
      2006. The increased operating loss for the microwave micro-circuitry segment
      was
      due to a
      $2,630,000 non-cash charge related to a partial impairment of goodwill and
      from the
      segment’s lower gross profit from the lower sales level when compared to the
      first six months of 2006.





*Interest
      and other expense, net.*





Interest
      and other expense, net was $71,000 for the second quarter of 2007 compared
      to
      interest and other expense, net of $33,000 for the first quarter of 2006.
      Interest and other expense, net was $114,000 for the first six months of 2007
      compared to interest and other expense, net of $52,000 for the first months
      of
      2006. Interest expense for the second quarter and first six months of 2007
      and
      2006 was principally incurred on borrowings under the term loans which the
      Company consummated during the fourth quarter of 2003 and refinanced in October
      2006. Interest expense for the second quarter and first six months of 2007
      was
      higher than the second quarter and first six months of 2006 due to the higher
      debt levels following the refinancing of the term loans in October 2006.





*Income
      taxes.*





The
      current tax benefits for the quarter and six months ended July 1, 2006 represent
      refundable Canadian tax credits for which FMI, as a technology company, has
      qualified.





As
      of
      June 30, 2007, the Company has significant deferred tax assets resulting from
      net operating loss carryforwards, tax credit carryforwards and deductible
      temporary differences, which should reduce taxable income in future periods.
      A
      valuation allowance is required when management assesses that it is more likely
      than not that all or a portion of a deferred tax asset will not be realized.
      The
      Company's 2002, 2003 and 2006 net losses have weighed heavily in the Company's
      overall assessments. The Company established a full valuation allowance for
      its
      remaining U.S. net deferred tax assets as a result of its assessment at December
      28, 2002. This assessment continued unchanged from 2003 through the first six
      months of 2007. In 2006 the Company recorded additional valuation allowances
      for
      certain Canadian deferred tax assets of $427,000 because it believed that it
      was
      more likely than not that the deferred tax assets would not be realized. In
      conjunction with the determination that goodwill was impaired, as described
      in
      Note 7, and the continuing losses at FMI, the Company established a full
      valuation allowance of $506,000 during the second quarter of 2007 for its
      remaining Canadian net deferred tax asset.




22





The
      Code
      Section 382 places a limitation on the utilization of net operating loss
      carryforwards when an ownership change, as defined in the tax law, occurs.
      Generally, an ownership change occurs when there is a greater than 50 percent
      change in ownership. If such a change should occur, the actual utilization
      of
      net operating loss carryforwards, for tax purposes, would be limited annually
      to
      a percentage of the fair market value of the Company at the time of such change.
      The Company may become subject to these limitations in 2007 depending on the
      extent of the changes in its ownership.





*Net
      income (loss).*





For
      the
      reasons set forth above, net loss for the second quarter of 2007 was $3,469,000
      compared to net income of $529,000 for the second quarter of 2006. Net loss
      per
      share for the second quarter of 2007 was $1.19 compared to net income of $.17
      per share for the second quarter of 2006.  Net
      loss
      for the second quarter of 2007 includes a
      non-cash income tax charge of $506,000 or $.17 per share to fully provide for
      a
      full valuation allowance against FMI’s deferred tax asset.





For
      the
      reasons set forth above, net loss for the first six months of 2007 was
      $4,733,000 compared to net income of $89,000 for the first six months of 2006.
      Net loss per share for the first six months of 2007 was $1.58 compared to net
      income of $.03 per share for the six months of 2006. Net loss for the first
      six
      months of 2007 includes a
      non-cash income tax charge of $506,000 or $.17 per share to fully provide for
      a
      full valuation allowance against FMI’s deferred tax asset.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      Company had liquid resources comprised of cash and cash equivalents totaling
      approximately $2,800,000 at the end of the second quarter of 2007 compared
      to
      approximately $6,000,000 at the end of 2006. The principal reasons for the
      reduction in cash at June 30, 2007 was the repurchase, in a private transaction,
      of 238,700 shares of its Common Stock for the treasury at $9.00 per share for
      an
      aggregate total of $2,148,300 from a group of investors on March 13, 2007,
      capital expenditures of $927,000 which exceeded operating cash provided of
      $177,000 and repayments of borrowings of $343,000. The Company's working capital
      was approximately $9,900,000 and its current ratio was 3.6 to 1 at the end
      of
      the second quarter of 2007 compared to $13,300,000 and 4.9 to 1, respectively,
      at the end of 2006. At June 30, 2007, the Company had available borrowing
      capacity under its revolving line of credit of $3,100,000.





The
      Company's operating activities provided operating cash flows of $177,000 during
      the first six months of 2007 compared to generating $366,000 of operating cash
      flows during the first six months of 2006. The primary sources of operating
      cash
      flows for the first six months of 2007 were the reduction of accounts receivable
      of $685,000, a reduction of other current assets of $166,000, and an aggregate
      increase in accounts payable, customer deposits and accrued liabilities of
      $379,000 offset by the six-month net loss of $4,733,000 which was reduced by
      depreciation and amortization of $1,292,000, the goodwill impairment charge
      of
      $2,630,000, the deferred tax charge of $506,000 and share-based compensation
      of
      $132,000, and an increase in inventories of $846,000. The primary sources of
      operating cash flows for the first six months of 2006 were the net income of
      $89,000 which was reduced by depreciation and amortization of $1,318,000 and
      share-based compensation of $82,000 offset by increases in accounts receivable
      of $174,000, inventory of $287,000 and an aggregate decrease in accounts
      payable, customer deposits and accrued liabilities of $734,000.





The
      Company made net cash investments in property, plant and equipment of $927,000
      during the first six months of 2007 compared to net cash investments made in
      property, plant and equipment of $979,000 during the first six months of 2006.
      These capital expenditures are related to new production and test equipment
      capabilities in connection with the introduction of new products and
      enhancements to existing products. The depreciated cost of capital equipment
      associated with Multi-Mix® Microtechnology was $6,204,000 at the end of the
      second quarter of 2007, a decrease of $543,000 compared to $6,747,000 at the
      end
      of fiscal year 2006.





The
      Company’s planned equipment purchases and other commitments are expected to be
      funded through cash resources and cash flows expected to be generated from
      operations, and supplemented by the Company’s $5,000,000 revolving credit
      facility, which expires October 18, 2008.





On
      October 18, 2006, the Company entered into a financing agreement with North
      Fork
      Bank which consists of a two-year $5,000,000 revolving line of credit, a
      five-year $2,000,000 machinery and equipment term loan due October 1, 2011
      (“Term Loan”) and a ten-year $3,000,000 real estate term loan due October 1,
      2016 (“Mortgage Loan”). This financing agreement replaced the prior financing
      agreement with CIT. Completion of the financing agreement resulted in additional
      cash loan proceeds of approximately $2,900,000 plus the release of previously
      restricted cash of $1,500,000. The revolving line of credit is subject to an
      availability limit under a borrowing base calculation (85% of eligible accounts
      receivable plus up to 50% of eligible raw materials inventory plus up to 25%
      of
      eligible electronic components, with an inventory advance sublimit not to exceed
      $1,500,000, as defined in the financing agreement). The revolving line of credit
      expires October 18, 2008. At June 30, 2007, the Company had available borrowing
      capacity under its revolving line of credit of $3,100,000. The revolving line
      of
      credit bears interest at the prime rate less 0.50% (currently 7.75%) or LIBOR
      plus 2.00%. The principal amount of the Term Loan is payable in 59 equal monthly
      installments of $33,333 and one final payment of the remaining principal balance
      of $33,333. The Term Loan bears interest at the prime rate less 0.50% (currently
      7.75%) or LIBOR plus 2.25%. The principal amount of the Mortgage Loan is payable
      in 119 equal monthly installments of $12,500 and one final payment of the
      remaining principal balance of $1,512,500. The Mortgage Loan bears interest
      at
      the prime rate less 0.50% (currently 7.75%) or LIBOR plus 2.25%. At June 30,
      2007, the Company, under the terms of its agreement with North Fork Bank,
      elected to convert $1,700,000 of the Term Loan and $2,875,000 of the Mortgage
      Loan from their prime rate base to LIBOR-based interest rate loans for one
      month
      at an interest rate of 7.57%, which expired July 18, 2007. The revolving line
      of
      credit, the Term Loan and the Mortgage Loan are secured by substantially all
      assets located within the United States and the pledge of 65% of the stock
      of
      the Company's subsidiaries located in Costa Rica and Canada. The provisions
      of
      the financing agreement require the Company to maintain certain financial
      covenants.




23





North
      Fork Bank and the Company amended the financing agreement, as of May 15, 2007,
      which (i) eliminates the fixed charge coverage ratio covenant for the quarter
      ending June 30, 2007, (ii) adds a covenant related to earnings before interest,
      taxes, depreciation and amortization (“EBITDA”) for the four quarters ending
      June 30, 2007 to require the Company to achieve a minimum level of EBITDA,
      and
      (iii) modifies the fixed charge coverage ratio covenant for periods after the
      quarter ending June 30, 2007. The Company was in compliance with these amended
      covenants at June 30, 2007.





On
      August
      9, 2007, North Fork Bank and Merrimac entered into a Pledge and Security
      Agreement, under which North Fork Bank consented to the guaranty by Merrimac
      of
      FMI's borrowings under the revolving credit agreement with The Bank of Nova
      Scotia in the amount of up to $250,000 (Canadian). In consideration for North
      Fork Bank providing such consent, Merrimac agreed to deposit $250,000 into
      a
      controlled collateral account with North Fork Bank and also agreed to prepay
      the
      mortgage loan portion of the credit facility with North Fork Bank with fifty
      percent of the proceeds from a sale of FMI up to a maximum amount of
      $500,000.





FMI
      has
      an amended formula-based secured revolving credit agreement in place with The
      Bank of Nova Scotia to borrow up to $250,000 (Canadian) (approximately $235,000
      US) at the prime rate plus 2 percent. Such agreement is guaranteed by Merrimac.
      No borrowings were outstanding under this agreement at June 30,
      2007.





FMI
      has a
      $336,000 (Canadian) (approximately $310,000 US) revolving lease line with the
      Bank of Nova Scotia, whereby the Company can obtain funding for previous
      production equipment purchases via a sale/leaseback transaction. As of June
      30,
      2007, $310,000 had been utilized under this facility. The Bank of Nova Scotia
      will not allow any new borrowings on this revolving lease line. Such leases
      are
      payable in monthly installments for up to five years and are secured by the
      related production equipment. Interest rates (typically prime rate plus 2.25
      percent) are set at the closing of each respective sale/leaseback transaction.
      During the first quarter of 2006, FMI obtained $160,000 (US) in connection
      with
      the sale/leaseback of certain production equipment. The related equipment was
      originally purchased by the Company in 2005.





Assets
      securing capital leases included in property, plant and equipment, net, have
      a
      depreciated cost of approximately $694,000 (US) at June 30, 2007 and $703,000
      (US) at December 30, 2006.





Depreciation
      and amortization expenses exceeded capital expenditures for production equipment
      during the first six months of 2007 by approximately $356,000, and the Company
      anticipates that depreciation and amortization expenses will exceed capital
      expenditures in fiscal year 2007 by approximately $300,000. The Company intends
      to issue commitments to purchase $1,500,000 of capital equipment from various
      vendors for the remainder of 2007. The Company anticipates that such equipment
      will be purchased and become operational during the second half of 2007.





The
      functional currency for the Company’s wholly-owned subsidiary FMI is the
      Canadian dollar. The changes in accumulated other comprehensive income for
      the
      second quarter and first six months of 2007 and 2006 reflect the changes in
      the
      exchange rates between the Canadian dollar and the United States dollar for
      those respective periods. The functional currency for the Company’s Costa Rica
      operations is the United States dollar.





24


RECENT
      ACCOUNTING PRONOUNCEMENTS





On
      November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP 123R-3"),
      "Transition Election Related to Accounting for the Tax Effects of Share-based
      Payment Awards", that provides an elective alternative transition method of
      calculating the pool of excess tax benefits available to absorb tax deficiencies
      recognized subsequent to the adoption of SFAS 123R (the "APIC Pool") to the
      method otherwise required by paragraph 81 of SFAS 123R. The Company elected
      to
      use the regular method to calculate the APIC pool.  The regular method will
      not have an impact on the Company's results of operations or financial
      condition for the quarter and six months ended June 30, 2007, due to the fact
      that the Company is currently using prior period net operating losses and has
      not realized any tax benefits under SFAS 123R.




In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition
      threshold and measurement of a tax position taken or expected to be taken in
      a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition. The Company adopted FIN 48 on December 31, 2006.  The adoption
      of FIN 48 did not have an impact on the opening retained earnings of the
      Company.




ITEM
      3.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





For
      quantitative and qualitative disclosures about the market risks affecting
      Merrimac, see “Quantitative and Qualitative Disclosures about Market Risk” in
      Item 7A of Part II of the Company’s Annual Report on Form 10-K for the fiscal
      year ended December 30, 2006, which is incorporated herein by reference. Our
      exposure to market risk has not changed materially since December 30, 2006.





ITEM
      4.
      CONTROLS AND PROCEDURES





As
      of
      June 30, 2007 (the end of the period covered by this report), the Company's
      management carried out an evaluation, with the participation of the Company's
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      Company's disclosure controls and procedures. Based upon that evaluation, the
      Chief Executive Officer and Chief Financial Officer concluded that, as of June
      30, 2007, the Company's disclosure controls and procedures were effective.





In
      designing and evaluating the Company's disclosure controls and procedures (as
      defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934),
      management recognized that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurances of achieving
      the
      desired control objectives, as ours are designed to do, and management
      necessarily was required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures. We believe that our disclosure
      controls and procedures provide such reasonable assurance.





No
      change
      occurred in the Company's internal controls concerning financial reporting
      during the Company's second quarter that has materially affected, or is
      reasonably likely to materially affect, the Company's internal controls over
      financial reporting.





PART
      II
      OTHER INFORMATION





ITEM
      1.
      LEGAL PROCEEDINGS.





Merrimac
      is a party to lawsuits, arising in the normal course of business. It is the
      opinion of Merrimac's management that the disposition of these various lawsuits
      will not individually or in the aggregate have a material adverse effect on
      the
      consolidated financial position or the results of operations of
      Merrimac.





ITEM
      1A.
      RISK FACTORS.





There
      have been no material changes to our Risk Factors from those presented in our
      Form 10-K for fiscal year 2006, except for certain updating changes to the
      Risk
      Factors “In future periods, we may be required to record an impairment charge
      against goodwill under which would have a material adverse effect on our results
      of operations”, section as presented below.





25




You
      should carefully consider the matters, as revised, described below and in our
      Form 10-K for 2006 before making an investment decision. The risks and
      uncertainties described below are not the only ones facing our company. Our
      business operations may be impaired by additional risks and uncertainties of
      which we are unaware or that we currently consider immaterial.




Our
      business, and the subsequent results of operations or cash flows may be
      adversely affected if any of such risks actually occur. In such case, the
      trading price of our common stock could decline, and you may lose part or all
      of
      your investment.




*In
      future periods, we may be required to record an impairment charge against
      goodwill, which would have a material adverse effect on our results of
      operations.*




As
      of
      June 30, 2007, the Company had approximately $1,063,000 of goodwill on its
      balance sheet. This amount represents the remaining excess of the total purchase
      price of our acquisition of FMI over the fair value of net assets acquired.
      During the second quarter of 2007 the Company incurred a goodwill impairment
      charge of $2,630,000. If the Company is required to record additional impairment
      charges related to goodwill, such charges would have the effect of decreasing
      the Company’s earnings or increasing losses in such period. If Merrimac is
      required to record an additional substantial goodwill impairment charge, net
      income per share or net loss per share could be materially adversely affected
      in
      such period.




ITEM
      4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




On
      June
      20, 2007, the Company held its Annual Stockholders Meeting at which the
      stockholders elected three members to the Company's Board of Directors. The
      stockholders of the Company elected Edward H. Cohen, Arthur A. Oliner and Harold
      J. Raveché as Class II Directors whose terms expire at the 2010 Annual
      Meeting.





The
      following sets forth the number of votes cast for, against or withheld, as
      well
      as the number of abstentions and broker non-votes, voted upon at the Company's
      June 20, 2007 Annual Stockholders Meeting:




Election
        of Directors.


For
              
              WithheldEdward
                  H. Cohen
              
              
              2,086,750
              
              
              743,511Arthur
                  A. Oliner
              
              
              1,996,276
              
              
              833,985Harold
                  J. Raveché
              
              
              2,096,102
              
              
              734,159





Ratification
      of J.H. Cohn LLP as the Company's independent registered public accounting
      firm.




For
                
                Against
                
                Abstain2,697,459
                
                
                5,297
                
                
                127,505




The
      Company’s three Class III directors, Mason N. Carter, Albert H. Cohen and David
      B. Miller and three Class I directors, Fernando L. Fernandez, Joel H. Goldberg
      and Ludwig G. Kuttner, continued as directors after the Annual Stockholders
      Meeting and are serving terms expiring at the time of the Company's annual
      meetings in 2008 and 2009, respectively, and until their respective successors
      have been duly elected and qualified.





ITEM
      5.
      OTHER MATTERS.





During
      the quarter ended June 30, 2007, the Company initiated an interim goodwill
      impairment test of its FMI reporting unit. This occurred as a result of FMI’s
      failure to meet 2007 bookings and sales targets, which resulted in continuing
      operating losses and a reduction of its bank borrowing availability. As a result
      of the impairment test, the Company recorded a non-cash goodwill impairment
      charge of $2,630,000 related to the Company’s FMI reporting unit for the quarter
      ended June 30, 2007. This charge was approved by the Audit Committee of the
      Company on August 9, 2007.





In
      conjunction with the determination that goodwill was impaired and the continuing
      losses at FMI, the Company established a full valuation allowance of $506,000
      during the second quarter of 2007 for its Canadian net deferred tax asset as
      management believed that it is more likely than not that its deferred tax asset
      will not be realized.





26




Company
      management has determined, and the Board of Directors has approved on August
      9,
      2007, that the Company should divest its FMI operations and is in the process
      of
      seeking interested parties.  The
      potential divestiture should enable Merrimac Industries, Inc. to concentrate
      its
      resources on RF Microwave and Multi-Mix® Microtechnology product lines to
      generate sustainable, profitable growth. Beginning with the third quarter of
      2007, the Company will reflect FMI as a discontinued operation and the Company
      intends to restate prior financial statements to reflect the results of
      operations, cash flows and financial position of FMI as discontinued operations.





As
      described elsewhere in this Form 10-Q, on October 18, 2006, the Company entered
      into a credit facility with North Fork Bank which consists of a two-year
      $5,000,000 revolving line of credit, a five-year $2,000,000 machinery and
      equipment term loan due October 1, 2011 and a ten-year
      $3,000,000 real estate term loan due October 1, 2016. On August 9, 2007, North
      Fork Bank and Merrimac entered into a Pledge and Security Agreement, under
      which
      North Fork Bank consented to the guaranty by Merrimac of FMI's borrowings under
      the revolving credit agreement
      with The Bank of Nova Scotia in the amount of up to $250,000 (Canadian). In
      consideration for North Fork Bank providing such consent, Merrimac agreed to
      deposit $250,000 into a controlled collateral account with North Fork Bank
      and
      also agreed to prepay the mortgage
      loan portion of the credit facility with North Fork Bank with fifty percent
      of
      the proceeds from a sale of FMI up to a maximum amount of $500,000.





ITEM
      6.
      EXHIBITS





Exhibits:





EXHIBIT
              NUMBER
            
            DESCRIPTION
                OF EXHIBIT31.1+
            
            Chief
                Executive Officer's Certificate, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2+
            
            Chief
                Financial Officer's Certificate, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1+
            
            Chief
                Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2+
            
            Chief
                Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





+
      Indicates that exhibit is filed as an exhibit hereto.





27




SIGNATURES




In
      accordance with the requirements of Section 13 or 15 (d) of the Securities
      Exchange Act of 1934, the Registrant caused this report to be signed on its
      behalf by the undersigned, thereunto duly authorized.


MERRIMAC
                INDUSTRIES, INC.Date:
              August 14, 2007
            By:
            /s/
              Mason N. CarterMason
                N. Carter
              Chairman,
                President and
              Chief
                Executive Officer




Date:
                August 14, 2007
              By:
              /s/
                Robert V. CondonRobert
                    V. Condon
                  Vice
                    President, Finance and
                  Chief
                    Financial Officer
 
 28